Calix, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 26, 2020; comparisons are with the quarter ended September 28, 2019. Dollar amounts are in millions unless otherwise indicated.
Business context and results
Calix provides cloud and software platforms, access systems, and services to communications service providers. Its systems revenue includes access and premises systems, software licenses, and cloud subscriptions; services revenue includes support, maintenance, professional services, training, and managed services.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $150.5 | $114.5 | $371.2 | $304.1 |
| Gross profit | $76.0 | $50.2 | $178.0 | $133.2 |
| Gross margin | 50.5% | 43.9% | 48.0% | 43.8% |
| Operating income (loss) | $21.8 | $(2.9) | $12.1 | $(16.9) |
| Net income (loss) | $20.5 | $(3.4) | $9.4 | $(18.2) |
| Diluted earnings (loss) per share | $0.32 | $(0.06) | $0.16 | $(0.33) |
Financial position, cash flow, and liquidity
- Revenue growth: Q3 revenue rose 31%; nine-month revenue rose 22%. Systems revenue increased 34% in Q3 and 24% year to date, while services revenue was down 3% in Q3 and up 3% year to date.
- Margins and expenses: Q3 systems gross margin was 51.6% and services gross margin 31.3%, versus 45.4% and 23.7% a year earlier. Nine-month operating expenses were $165.9 million, including $6.3 million in restructuring charges.
- Cash generation: Net cash from operating activities was $20.9 million for the first nine months, compared with $4.0 million in 2019. Capital expenditures were $5.6 million, versus $12.4 million. Receivables increased $22.6 million, primarily due to shipment timing.
- Cash and investments: At September 26, cash and cash equivalents were $63.8 million and current marketable securities were $40.0 million, or $103.8 million combined. Including restricted cash, total cash, cash equivalents, and marketable securities were $104.4 million.
- Debt and liquidity: No borrowings were outstanding on the $35 million Bank of America revolving facility; full availability was reported, and the company was in compliance with its requirements. The facility matures in January 2023 and is secured by substantially all company assets, including intellectual property. Separate financing arrangements had $3.3 million outstanding.
- Balance sheet: Total assets were $385.3 million, total liabilities $137.8 million, and stockholders’ equity $247.5 million. The company reported an accumulated deficit of $693.2 million.
Material changes and unusual items
- Calix completed a public offering of 3.22 million shares at $20 per share in August, receiving $60.1 million in net proceeds. The board also retired approximately 5.33 million treasury shares.
- Q3 revenue growth was primarily driven by higher systems sales to small and regional customers, and to a lesser extent larger customers, as service providers accelerated some deployments to address network capacity demand.
- Management attributed improved systems margins to growth in all-platform offerings and favorable customer and product mix. Q3 systems margin included $0.6 million of U.S. tariff-related costs and $0.7 million of intangible-asset amortization.
- A restructuring plan tied to a work-from-anywhere operating model and product-line consolidation generated $6.3 million of nine-month charges, including $5.1 million for facilities and $1.2 million for severance and related benefits. The company reported $1.5 million of restructuring accruals remaining at quarter-end.
- Tariff and tariff-related costs were $2.3 million for the first nine months of 2020, compared with $5.1 million in the same 2019 period. Management said the supply-chain realignment was expected to be completed by the end of 2020.
Outlook, risks, and contingencies
- Outlook: The filing gives no numerical revenue or earnings guidance. Management expected existing cash, cash equivalents, marketable securities, operating cash flow, and available credit to cover anticipated needs for at least the next 12 months, based on its current operating plan.
- COVID-19 and supply chain: Management reported strong near-term demand for bandwidth and Wi-Fi, but said the pandemic’s longer-term effect on customer purchasing was uncertain. Component shortages, supplier restrictions, manufacturing constraints, longer lead times, and higher air-freight costs could affect product availability, revenue, and margins.
- Commitments: Outstanding inventory purchase commitments were approximately $119.9 million, all due within one year. Total contractual obligations were $156.9 million, including purchase commitments, financing arrangements, and operating leases. Minimum revenue-share payments tied to developed software may require a true-up if minimums are not achieved over the sales period.
- Customer concentration: Lumen represented 12% of Q3 revenue and 14% of nine-month revenue; it accounted for 13% of receivables at quarter-end. Management also cited customer spending, capital budgets, and purchasing timing as sources of volatility.
- Other risks: The filing highlights dependence on a limited number of suppliers and manufacturing partners, tariffs and trade-policy uncertainty, competition, customer credit and collections, product quality and warranty exposure, cybersecurity and data privacy, and risks related to the cloud ERP system. Management said disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting.
- Legal matters: The company said it was not party to legal proceedings that management expected to have a material adverse effect. No off-balance-sheet arrangements were reported.
Investor verification checklist
- Confirm whether the Q3 revenue and margin improvement is repeatable, particularly as systems sales account for 95% of quarterly revenue.
- Track component availability, supplier lead times, freight costs, and completion of the supply-chain transition.
- Monitor receivables, collections, and Lumen’s revenue and receivables concentration.
- Review the company’s ability to meet the $119.9 million of near-term inventory purchase commitments and manage excess or obsolete inventory.
- Assess ongoing profitability and operating cash flow against the accumulated deficit, while accounting for offering proceeds and potential share dilution.
- Verify the pace and cost of restructuring, the revenue-share obligation, and the status of credit-facility compliance and availability.